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With the major averages setting 2009 highs Tuesday, strategists at major firms were lifting their targets for the Standard & Poor's 500 to the neighborhood of 1050 or so. Coming off the recent low of about 875, that would just qualify for the popular bull market definition of a 20% gain.

In case you were blissed-out at the beach for the past week or so, the market's move was catalyzed by a parade of earnings reports that beat analysts' diminished expectations. "It appears aggressive cost cutting and a slower rate of decay in top-line revenue combined to boost earnings," writes Mizuho Securities chief economist Steven Ricchiuto.

Market sentiment since earnings season has gone from deeply depressed to a burst of optimism, according to the proprietary data from Woody Dorsey's Market Semiotics. The current pop is "just a continuation of the uptrend from the March lows," he writes in a note to clients.

Overall, Dorsey sees the market remaining in a band from 850 to 1000 on the S&P 500. "Regardless of punditry and predictions, stocks may simply be tracing out a range for a while," he writes.

"One of the more frustrating environments," characterized by "quick reversals and rotations," is how Louise Yamada, the veteran market watcher who runs LY Advisors, sizes up the current market.

The post-1938 experience continues to offer the best historical analogy for the current market, Yamada has previously outlined ("Do Be Wary of Green Shoots," May 25.)

That period featured a 46%-plus rally off the lows, similar to the move since March. That was followed by 10% pullback (compared to 7%-8% this time), which was followed by another 26% rally ("could this be it??") But, Yamada points out, that final bounce was followed by a bear-market reversal.

Meanwhile, "the indicators flip-flop almost weekly," she adds. "We've been recommending trailing stop-losses for any long positions since they can be given back quickly." (Stop-loss orders are triggered when a security hits a certain price in order to lock in gains or limit losses.)

From the economist's viewpoint, Mizuho's Ricchiuto observes that the S&P 500 could climb towards key resistance at 1000. "To push beyond this key resistance, the equity market will require either a sustained, powerful recovery or a monetary policy mistake like the one Alan Greenspan made earlier this decade when convinced the [Federal Open Market Committee] to hold short rates lower than they should been even though a speculative bubble was beginning to form in the real estate market."

In his Congressional testimony and op-ed article in the Wall Street Journal ("The Fed's Exit Strategy", July 21,), Federal Reserve Chairman voiced confidence the central bank had the ability to withdraw the monetary stimulus it provided to deal with the credit crisis.

But there's also the question of the timing and magnitude of the draining, according to Northern Trust economist Asha Bangalore. There are two precedents, neither of which are encouraging.

The Fed began tightening in 1936 to reduce the excess reserves in the banking system, which the central banks saw as an inflationary threat. But banks were holding the reserves as a cushion of safety; when the Fed drained them away, the second phase of the Great Depression took hold.

The other precedent is the one cited by Richiutto, when the Fed pushed the federal funds rate to 1% in 2003-2004 to stave off deflation and was slow to raise short-term rates from that extraordinarily low level. That was when the subprime mortgage boom took hold.

"Both these historical episodes indicate the Fed is not infallible and suggests that the timing and magnitude of monetary policy changes is a tightrope walk," Bangalore writes. "Therefore, it appears that the Fed will have to be not only deft but also lucky to be successful in the management of monetary policy in the months ahead."

That's the rub. Writing on his "Blitz Bits on Capital Markets and the Economy" blog (http://econmkts.blogspot.com/), Steve Blitz observes that since Bernanke missed the boom that led to the bust, he's likely to make the same mistake.

That is, focusing on measures of inflation such as the consumer price index rather than paying attention to credit excesses.

Richiutto thinks that in addition to conventional guides, such as the Taylor Rule (which uses the slack in the economy as a measure of inflationary pressures), "the makers of policy will be looking for any sign of excess speculation in asset markets as a sign of when policy accommodation needs to be reversed."

That could be tricky, indeed. If excess liquidity pushes up commodity or stock prices next year while unemployment remains in double-digits, which will the Fed focus on?

As David Rosenberg of Gluskin Sheff has pointed out on numerous occasions, the Fed has never tightened policy until the unemployment rate has clearly topped and has begun to fall. That's the empirical record.

And, indeed, Bernanke indicated the Fed will maintain its near-zero rate target for an extended period. Meanwhile, the earnings picture is brightening, which makes for a powerful cocktail for stocks.

Given that, the averages ought to be making new highs. For now, they're still stuck in a range.